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Morningstar | Cuba Travel Restrictions Ding 2019 EPS Growth at Carnival, Royal, and Norwegian; Shares Undervalued. See Updated Analyst Note from 07 Jun 2019

On June 4, the Trump administration imposed travel restrictions on visits to Cuba by U.S. citizens, stripping people-to-people travel to the island, prohibiting educational and cultural trips to the island. Given that the constraints were effective June 5, the narrow-moat cruise lines, Carnival, Royal Caribbean, and Norwegian have scramble to shuffle their high-yielding Cuba itineraries to alternate ports, offering customers compensation for the altered redeployments. For Norwegian, the company is offering a 50% refund of the cruise fare and a 50% future cruise credit for a future booking through December 2020, or a full refund for those that cancel through June 11 for trips through Sept. 2. For sailings after Sept. 2, bookings are automatically being canceled and refunded. These accommodations made to customers, along with promised payments to travel agents and a very short re-booking window for the modified voyages, has led Norwegian to anticipate a $0.35-$0.45 impact from the change in regulation (about a 7% impact to prior $5.40-$5.50 guidance). We have lowered our 2019 earnings per share forecast for Norwegian to $5.14 from $5.54 per share, but have taken only a modest per diem downtick to 2020 yields, to $264 from $267, as the company has a longer period to protect rebooked yields further out.

We are lowering our fair value estimate to $67 from $69 in response to the lost long-term opportunity Norwegian has encountered for the change in Cuba restriction. In our opinion, this impact neutralizes over the next year as itineraries are rebooked, and we don’t anticipate any change to our longer-term forecast that calls for average yield growth of about 2.5% and cost growth of 1.5% post-2019. We view shares as undervalued, trading at a 21% discount to our updated fair value estimate and at just 10 times our 2019 EPS estimate versus an estimated 12.5% EPS growth over our explicit forecast.

Narrow-moat Royal Caribbean was similarly impacted by the travel restriction, although to a lighter degree, anticipating a $0.25-$0.30 impact in EPS in 2019, representing a 3% penalty to its prior $9.65-$9.85 full-year guidance. With Cuban itineraries composing 3% of 2019 capacity, Royal is also left scrambling to reposition its fleet. Like Norwegian, Royal has offered all 2019 passengers set for travel on Majesty and Empress the opportunity to take a 50% refund if they remain on the sailing or a full refund if they choose to cancel. The alterations to 2020 sailing are still underway, but we expect either similar accommodations or a full refund to result from the change, as well. We reduced our 2019 EPS to $9.51 from $9.85 per share ($0.34) and have taken our fair value estimate to $131 from $133 to account for the lost opportunity. Royal remains modestly undervalued, at about an 8% discount, and remains the only cruise operator in 3-star territory on our coverage list.

While narrow-moat Carnival has yet to disclose the financial impact of the change, we surmise it will be lower on a percentage of EPS basis given the lower exposure to the region; it has been estimated that around 1%-2% of itineraries go to Cuba, a lower rate than at either Norwegian or Royal. The majority of remaining 2019 Carnival sailings were on Paradise and Sensation, which have about 4,100 available lower berths in aggregate by our estimate, along with Holland America’s Veendam; Seabourn was not slated to sail to Cuba until later this year. We plan to make appropriate adjustments to our $4.50 2019 EPS estimate when we gain further clarity on the expected impact but don’t anticipate any material change to our $66 fair value estimate given the low exposure. Carnival shares remain undervalued, trading at a 22% discount to our fair value estimate and at 11.5 times our 2019 EPS estimate. The company’s current remedies to the policy change are slightly less favorable than its peers; Carnival is offering a $100 per person onboard credit for those remaining on the sailing, a $50 credit if the traveler moves to another itinerary, or a full refund upon cancelation. The 2020 remediation includes remaining on the sailing or moving to another itinerary with no credit on either, or canceling and receiving a full refund.